How to get rid of the mind-set and reduce costs through internal production?

Case study: Why can Tesla still succeed in many crises?

Although the global automotive manufacturing industry has suffered from serious component shortages, the delivery of Tesla electric vehicles has still increased by 87% [1].How do they achieve an unprecedented surge in production? The answer is: through the combination of vertical integration and originality.

Elon Musk decided to use the company's in-house equipment and software engineers, so that there is no need to outsource PCB manufacturing, software programming, assembly technology, and other creative work, so Tesla can fully control manufacturing.

Rebecca Elliot wrote in a report published in The Wall Street Journal that Tesla uses “in-house software engineers and experts” to ensure “the continuous operation of the production line” and “quickly rewrite the necessary software to integrate alternative chips on the car [1].”It is precisely because of the internal production method that Tesla was able to deliver 936,000 cars in 2021. At the same time, other automakers are still waiting for outsourced chips that cannot be delivered.

Tesla can still succeed in the chip shortage cycle. What can we learn from it?

1.Use existing resources

Elon Musk did not regard the shortage of components as an inevitable or insurmountable problem, but used existing resources to replace scarce resources. Other companies can follow suit. Whether it's asking in-house engineers to rewrite the software or rework the PCB to retain and reuse more urgently needed components (rather than letting them become waste products), as long as we get out of the stereotype thinking, we can use many existing resources.

2.Complete as many production processes as possible within the company

Adopting an internal production model like Tesla, there is no need to wait for offshore factories to ship in the order of priority, wait for a long delivery cycle, or withstand the current inflation rate in the market. Through its internal production and assembly model, Tesla has avoided the problems faced by many other manufacturers in the automotive industry, and many forward-looking companies can do the same.

Owning production equipment can achieve real cost savings

After all, not all companies can reach Tesla's scale. Even if the scale is no larger than Tesla, as long as it has SMT production equipment, production costs can be reduced. Through in-house production, there is no need to listen to the one-sided words of outsourced manufacturers, because they have a good understanding of the raw materials the company chooses to use, and they can flexibly find alternatives in the event of a shortage of preferred parts.

With high-quality equipment and a small group of excellent employees, as long as the company's business has a certain creativity, it can be done.：

Flexible control of production levels

Shorten product conversion cycle

Increase local customer business

Having an assembly production line can change the entire pattern. If the product uses surface mount technology, then having a production line can help the company reduce costs and increase inventory levels. Compared with handing over money to outsourced manufacturers and bearing various costs and inflation rates, internal production only needs to bear material costs and labor costs. Tom Beck wrote an article called "Case Analysis of the impact of converting SMT assembly to in-house production on delivery Cycle, inventory, quality, and total cost". In the article, he said that converting assembly to in-house production can save an average of 35%~40% of the cost.

The internal production business model is growing day by day

For example, CoralVue, an aquarium supply company, recently began to switch production to in-house production, which has significantly improved the production process. When asked about the entire decision-making and experience, its CEO David D'Aquin said that when outsourcing production tasks before, he would receive a notice that “the delivery cycle takes 52 weeks” [2]. The extension of the cycle and the "increasing costs of overseas PCB manufacturers" prompted them to decide to purchase equipment and manufacture products in-house. D'Aquin said that since switching to in-house production, they have been able to “flexibly control inventory” and “alleviate the company's cash flow problems.”

Automated SMT production lines can be operated by only a few people, which is especially advantageous in an era when labor is increasingly scarce. Forward-looking companies can learn from CoralVue's success stories to achieve prosperity and development.

How can tax incentives reduce equipment costs?

The huge expenditure on the initial stage of investment in production equipment is prohibitive. There are some financing options available on the market, including sufficient turnaround time to start production and generate profits in the event of payment delays.

At the same time, you can also use Article 179 of the Tax Law to reduce the tax amount when filing taxes. Through Clause 179, the company can deduct the full amount of equipment purchased at the time of declaration, thereby maximizing the cost savings. In 2018, Clause 179 stated that companies can subtract the total amount of equipment purchased (up to US11 million) when reporting the total tax paid in the past tax year. This policy is good news for small companies [3].

Decided to start internal production

Since the U.S. manufacturing industry has been driven by demand and is relatively depressed, there have been many problems in the supply chain, human resources, and supplier delivery, and many companies are looking for solutions. The most successful solution at present is to control production that has been transferred overseas. Internal production is effective because it is relatively more cost-effective; and there are ready-made financing and cost offset options. Owning equipment and directly paying for components and labor costs can significantly reduce expenditure costs.

In the current economy, the main problem is that companies cannot sell what they don't have. Companies can now choose to use available resources to improve production immediately and experience long-term cost savings. This will enable the company to get rid of the additional burden of paying for air freight, overtime and other expenses, and strive to deliver the products to customers as soon as possible. Through internal production, customer needs can be met without these costs. Getting rid of the mind-set allows companies to deliver high-quality products quickly and consistently. The cost of this model is only a small part of what they spent on outsourcing production before.

For companies considering purchasing equipment to switch to in-house production, David D'Aquin suggested: “Given the current state of the world economy and politics, we believe that it is ideal to control as much business operations as possible. If PCB is the core key of the business, then investment in SMT production lines will determine the company's future success.”